1. Business
  2. Accounting
  3. for many years waiters company manufactured a single product called...

Question: for many years waiters company manufactured a single product called...

Question details

For many years, Waiters Company manufactured a single product called a mono-relay. Then three years ago, the company automated a portion of its plant and at the same time introduced a second product, called a bi-relay, which has become increasingly popular. The bi-relay is a more complex product, requiring one hour of direct labor time per unit to manufacture and extensive machining in the automated portion of the plant. The mono-relay requires only 0.75 hour of direct labor time per unit and only a small amount of machining. Manufacturing overhead costs are currently assigned to products based on direct labor-hours.

Despite the growing popularity of the company’s new bi-relay, profits have been declining steadily. Management is beginning to believe that there may be a problem with the company’s costing system. Material and labor costs per unit are as follows:

   Mono-Relay                      Bi-Relay

Direct materials                                                                      $35                              $48

Direct labor (0.75 hour and 1.0 hour @ $12 per hour)          $9                              $12

Management estimates that the company will incur $1,000,000 in manufacturing overhead costs during the current year and 40,000 units of the mono-relay and 10,000 units of the bi-relay will be produced and sold.

Management is considering using activity-based costing to apply manufacturing overhead cost to products for external financial reports. The activity-based costing system would have the following four activity cost pools.

                                                                                    Estimated                    Mono- Bi-

Activity Cost (and Activity Measure)                                Cost         Total   Relay   Relay

Maintaining parts inventory (number of part types) $ 180,000           225       75      150

Processing purchase orders (number of orders)              90,000        1,000     800      200

Quality control (number of tests)                                  230,000        5,750   2,500   3,250

Machine-related (machine-hours)                                 500,000      10,000   4,000   6,000

Total overhead cost                                                  $1,000,000       

                        Required:

  1. Determine the unit product cost for each product using the current system.
  2. Determine the unit product cost for each product using the activity-based costing system.
  3. In view of the outcomes for the two costing systems, explain which costing system would be more appropriate.
Solution by an expert tutor
Blurred Solution
This question has been solved
Subscribe to see this solution